Reviewed by Barry Zalma Esq.
Summary: An automobile total loss can be a difficult situation for an insured—especially if he or she still owes more money on the car than it is worth. Claim representatives and agents must be sensitive to the needs of the insured and handle claims accordingly. This article explains how a total loss is determined, how to calculate actual cash value (ACV), and what is meant by “diminution in value.”
An automobile or motor vehicle total loss is defined as an auto that is physically not repairable, stolen and not recovered, or damaged to the extent that the cost of repairs plus the salvage value equals or exceeds its actual cash value (ACV). Actual cash value in an auto loss is considered to be the market value of the vehicle immediately prior to the loss, as opposed to, say, a homeowners loss in which actual cash value is often replacement cost less depreciation. Of course, the policy should be reviewed since some insurers now define ACV to fit the needs of the insurer. Some will define ACV as replacement cost less physical depreciation, the difference between the fair market value before loss and the fair market value after loss, or a combination of methods of determining ACV.
In addition to ACV, a claims representative will also consider in the settlement process title fees and taxes. Such costs are part of the ACV with insureds and a negotiated item with third-party claimants in most jurisdictions. Market value is the price that an auto can be expected to bring when sold in a given market where both the seller and buyer are willing and under no pressure to buy or sell.
Claim representatives and estimating personnel must establish the repair cost, ACV, and salvage value of the vehicle in question to determine if that vehicle is a total loss. Insurers will usually consider an auto a total loss when the estimated repair cost exceeds the estimated ACV of the vehicle. Generally, 60 percent is an acceptable guideline above which the vehicle is considered to be a possible total loss. Vehicles damaged to the 60 percent extent are referred to as “borderline” totals.
Many losses can quickly be determined “totals.” Others require the completion of a detailed estimate. If the adjuster decides to “total” a vehicle with damage in the 60 percent range, he should complete a detailed inspection of the vehicle to arrive at the ACV and consult the market in the area where the loss occurred for identical or similar vehicles that have sold in months close to the date of loss.
Situations do arise where vehicles are considered total losses when damaged to a lesser extent. For example, vehicles that are submerged to the point where water enters the dashboard often are classified as “obvious” or “dashboard” totals. The salvage value of such a vehicle is generally very high, because the sheet metal components incur little damage from being temporarily submerged. However, the potential does exist for costly damage to electrical components which generally do not immediately appear. The same is true in the case of an engine fire—the body of the vehicle might be undamaged while the engine and the wiring sustain extensive damage.
Factors That Must Be Considered
When confronted with a total loss, the claim representative must consider the length of repair time, potential hidden damage, and—if the vehicle is not repairable to its pre-accident condition—possible diminution of value. (For a discussion of diminution of value, see Diminution of Value later in this article.)
How long a possible repair might take is especially important in claims involving liability to a third party. That third party will have a valid loss of use claim. And, unlike a first-party insured whose loss of use claim is limited by the policy, third-party claims are limited only by what a jury would consider appropriate. In the case of a third-party claimant, the courts have ruled that the expense does not have to be incurred to be recoverable. For example, a person might own two cars. One is damaged in a not-at-fault accident. In theory, the person could drive the other car. The loss of the vehicle means the owner does not have what he had before the loss and is therefore entitled to be put back the way he was whether he could drive his second car or not. There are many valid reasons why claiming there was no loss of use is unacceptable. The claimant is entitled to loss of use whether he uses his second car or a loaner from a dealer or not.
Hidden damage may exist when a car is damaged to the extent that it is in the borderline range. As a practical matter, there is usually no way to determine hidden damage on heavily damaged vehicles until dismantling is completed. The experience and expertise of the estimator, claim representative, and repair person must be relied upon to consider some allowance in the estimate for the existence of potential hidden damage.
Diminution of value claims result when repairs do not restore the value of the repaired vehicle to the market value it had immediately prior to the accident. In other words, there is an actual economic loss that may be recovered in tort. On the other hand, in first party collision or comprehensive coverage where the policy only promises to repair or replace, diminution in value claims only may be recovered in a few states like Georgia.
Vehicle evaluation is not an exact science. A number of tools and resources are available to the skilled claim representative to establish the ACV of a vehicle and conclude a fair settlement. Often it is more time consuming and difficult to reach an agreement with the owner on the ACV amount than to establish the ACV offer.
The National Automobile Dealers Association (NADA) publishes the Official Used Car Guide each month. This guide covers a specific geographic region and includes vehicles seven years old or less. The guide book prices are compiled from figures provided by the association's dealers. These dealers are generally the larger dealers and as a result their prices include overhead costs, such as used car warranty costs, general minor repair costs, and used car set-up costs incurred before putting the car on the lot for resale. For these reasons, the prices found in the guide are generally considered to be in the upper range of values for vehicles. Since the guide covers such a large area, the prices quoted may be high or low for a more specific market area.
The NADA book is but one resource to help establish a “guideline as to the price range.” The book should not be used as the sole means of establishing ACV and making a settlement offer.
When dealing with vehicles older than seven years, another guide is available from NADA. The Official Older Used Car Guide is published on a national level three times a year. In includes vehicles from eight to eighteen years of age. Again, the adjuster should not rely on this guide as the sole means of establishing ACV on older vehicles.
One other guide, Cars of Particular Interest, contains information on older, collector type, or exotic vehicles. Again, the adjuster should consider this resource as a guide. There are several other reputable automobile price guide books on the market for vehicles of all ages.
The most reliable way to establish the ACV in a local market is through a combination survey of used car dealers and private sellers. Local daily newspapers, weekly suburban publications, buy-and-sell type publications, and magazines published just for vehicles are common sources. Ideally, the claim representative will conduct a market survey. Often the Internet can be easily utilized in making a determination of value.
Most often the adjuster turns to an outside vendor for help in establishing ACV. These vendors collect local market information by conducting actual dealer lot surveys or reviewing local classified advertising, or a combination of the two. Market survey information is available to the claim representative on a computer network. Information on three or four cars is usually immediately available for comparison purposes.
The claim representative must make adjustments to quoted prices from all sources in order to account for differences in equipment and condition of the damaged vehicle and the comparable vehicles that were located. The claim representative's objective is to establish a fair range of values. He can establish such a range based on the market survey previously mentioned.
After establishing a range of values for the damaged vehicle, the adjuster begins settlement discussions with the owner. The use of a range involves the establishment of a minimum and a maximum value amount. The range of values must be legitimately established. If not, a company might be in violation of an applicable Unfair Claim Settlement statute if the adjuster begins the negotiating process with the owner at the minimum.
Unfortunately, the best efforts of the claim representative do not always establish a settlement offer that is acceptable to the vehicle owner. A third-party claimant's recourse is a suit or some form of arbitration. A first party may demand appraisal under the terms of the contract.
Part D, “Coverage for Damage to Your Auto” in the ISO 2005 personal auto policy (PAP) contains the appraisal section. It reads:
A.If we and you do not agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. The appraisers will state separately the actual cash value and the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each party will
1.Pay its chosen appraiser; and
2.Bear the expenses of the appraiser and umpire equally.
B.We do not waive any of our rights under this policy by agreeing to an appraisal.
The same section of the policy provides a “Limit of Liability” for applicable first party claims. The policy states:
A.Our limit of liability for loss will be the lesser of the:
1.Actual cash value of the stolen or damaged property; or
2.Amount necessary to repair or replace the property with other property of like kind and quality.
However, the most we will pay for loss to:
1.Any “non-owned auto” which is a trailer is $1500;
2.Electronic equipment that reproduces, receives or transmits audio, visual or data signals, which is permanently installed in the auto in locations not used by the auto manufacturer for installation of such equipment is $1,000.
B.An adjustment for depreciation and physical condition will be made in determining actual cash value in the event of a total loss.
C.If a repair or replacement results in better than like kind or quality, we will not pay for the amount of the betterment.”
For an in-depth discussion of the physical damage portion of the personal auto policy, see Personal Auto Policy—Part D.
Auto Body Repair Consumer Bill of Rights
Some states, like California have adopted an Auto Body Repair Consumer Bill of Rights. The California version follows.
A Consumer is entitled to:
Select the auto body repair shop to repair auto body damage covered by the insurance company. An insurance company shall not require the repairs to be done at a specific auto body repair shop.
An itemized written estimate for auto body repairs and upon completion of repairs, a detailed invoice. The estimate and the invoice must include an itemized list of parts and labor along with the total price for the work performed. The estimate and invoice must also identify all parts as new, used, aftermarket, reconditioned or rebuilt.
Be informed about coverage for towing and storage services.
Be informed about the extent of coverage if any, for a replacement rental vehicle while a damaged vehicle is being repaired.
Be informed of where to report suspected fraud or other complaints and concerns about auto body repairs.
Seek and obtain an independent repair estimate directly from a registered auto body repair shop for repair of a damaged vehicle, even when pursuing an insurance claim for repairing the vehicle.
In dealing with total loss situations, claim representatives often become involved with lienholders and lessors. Companies are required by law to protect these parties up to their interest but not over the value of the collateral. The policy provides protection to anyone holding a valid interest in the subject property. Settlement practices to protect these interests include the issuance of drafts that are payable both to the named insured and the lienholder.
As leasing vehicles as a means of financing has gained in popularity, the situation is encountered where the value of the vehicle is less than the amount owed to the lessor or lienholder. This situation is commonly referred to as being “upside down” on the lease. Similar situations occur with regard to the standard auto loan where, because of the long term of such loans, the loss places the insured in an “upside down” position on the loan.
This happens most often when the purchase or lease price of a relatively new vehicle includes in the finance package credit life insurance, the price of an extended warranty, or a loan spread over a period longer than three years. Little, if any, down payment is also a common occurrence that will result in an upside down note.
While the unused portion of insurance policies and warranty agreements are refunded on a prorated basis, interest refunds are not calculated on a prorated basis. Prepayment penalties are common. Termination of the lease prior to the time stated in the lease agreement or excess mileage over that promised by the lease, usually call for a “penalty,” which is not compensable under the contract.
Note to agents: ISO has an endorsement available, PP 03 35 09 93 Auto Loan/Lease Coverage, that agrees to pick up the extra amount over an ACV settlement. See Endorsements Used with the Personal Auto Policy. The coverage provided by this endorsement is often referred to as “gap” insurance.
Diminution of value is the difference in market value immediately before and after damage to property. The cost of repairs is generally accepted as the measure of damages, although in some instances loss of value may act as evidence of damage.
In a third-party tort situation the measure of damage is usually the difference between the fair market value of the vehicle before the loss and its value after the loss. In a comprehensive or collision insurance policy, the insurer historically promised only to repair the vehicle using materials of like kind and quality.
The majority of courts have ruled that loss of value is not payable if the damaged property could be repaired to its pre-accident condition without any loss in value. In such cases, repair costs afforded the best remedy. Later, some courts adopted the theory that if the property could not be restored to its pre-accident condition, the owner may (if desired) accept the costs of repair plus loss of use, and the difference between the value before and after the damage was incurred. Common public perception is that the value of a car that has not been in an accident will always be greater than that same vehicle that has had to be repaired.
As discussed, the cost of repair plus loss of use is not mutually exclusive of a loss of value remedy. If a party can prove a diminished value after repairs are concluded, some jurisdictions hold the party is entitled to both measures of damages. The idea is to make the owner whole again. If the only way this can be accomplished is through a combination of damages, such damages should be paid. In State Farm Mut. Auto. Ins. Co. v. Mabry, 556 S.E.2d 114 (Ga. 2001), the court ruled that an insurer must pay for diminution of value. Mabry raised serious concern among insurers because it required payment of sums greater than that for which a premium was collected. It awarded the insured both the cost to repair and the diminution in value of the car after it was repaired. It ignored, however, the earlier decision in Eby v. Foremost Ins. Co., 374 P.2d 857 (Mont. 1962), where the Montana Supreme Court held that it “cannot be said that there has been a complete restoration of the property unless it can be said that there has been no diminution of value after repair of the car.”
Since Mabry, virtually all of the courts finding no coverage for diminution of value have done so because the word “repair” has a plain meaning that does not encompass payment for the diminished market value after the repair is completed. Rather, the plain meaning of “repair” contemplates physical restoration. Many insurers, to avoid argument, now add to their policy's wording, endorsements, or definitions, language establishing that the insurer does not intend to, nor will it, pay for diminution of value after the automobile was repaired; others have simply increased premium to cover the additional payments.
When property of any kind is damaged and repaired, the resale value of the property can easily be diminished because of the stigma carried by the repaired vehicle or property. An automobile is likely to suffer this type of diminution in value after it is damaged in an accident and repaired more than other types of property. The resale value of an automobile most likely will be less for one repaired after an accident than for a comparable automobile that has not been damaged and repaired. This is not true, however, of all types of property. A fifty-year-old house that is damaged by fire and rebuilt will usually be more valuable than it was before the fire.
ISO provides an endorsement that adds an exclusion to the physical damage coverage section (part D) of the PAP; the endorsement is not yet approved in all jurisdictions. PP 13 01 12 99, Coverage for Damage to Your Auto Exclusion Endorsement, states that the insurer will not pay for loss to the covered auto or any nonowned auto due to diminution in value. See Endorsements Used with the Personal Auto Policy.
The reasoning behind this endorsement is that an insured, after being involved in auto accident, claims that his auto is not worth what it was prior to the accident even if repaired promptly and professionally. The auto has suffered a loss in value because of the accident and that is a “loss” that is covered under the insuring agreement. Such coverage would put the insured in the position he was prior to the loss and that is the purpose of the insurance policy. The insurer is using this endorsement to make the point that part D coverage is for “direct and accidental loss” and that means only actual physical damage to the covered auto and not a loss in value. Since some courts might agree with the insured's interpretation of the meaning of “loss”, and since the PAP had no exclusion that addressed the issue, PP 13 01 12 99 was written; a diminution in value loss is now specifically excluded. Some states have not approved this endorsement; see, for example, Georgia, Louisiana, or Maryland.
It is well settled in Louisiana and the rest of the United States that insurance companies may limit coverage in any manner they desire as long as the limitations do not conflict with statutory provisions or public policy. Farmers Seafood Co., Inc. v. Progressive Security Ins. Co., 799 So.2d 866 (La.App. 2d Cir. 2001).
In Louisiana, the courts have moved toward the majority position that the policy language does not support coverage for diminished value. See, for example, the ruling in Campbell v. Markel American Ins. Co., 822 So.2d 617 (La. App. 1st Cir. 2001), where the appellate court reversed the trial court and held that the obligation to pay the cost of repair or replacement did not require the insurer to pay the diminution in market value. Similarly, in Townsend v. State Farm Mut. Auto. Ins. Co., 793 So.2d 473 (La. App. 2d Cir. 2001) and Defraites v. State Farm Mut. Auto. Ins. Co., 864 So. 2d 254 (La. App. 5th Cir. 2004), the court reversed an earlier decision that an auto accident victim was entitled to diminution of value.
At this point, it is important to make a distinction between first- and third-party claims In the case of a third party, loss of value is often recoverable under the liability coverage. In the case of a third-party claim, diminution of value recovery is predicated on legal liability. The insured must have acted in such a way as to be held responsible for the accident (usually negligence), and those acts must have caused the damages for which recovery is being sought. In Defraites, the victim brought a class action suit against State Farm because the insurer had failed to make an offer of diminution of value. The court said that these claims required case-by-case assessment, and so class action was not permitted; in Defraites' situation he had failed to ask for diminution of value.
The distinction made in Defraites between contract and tort law was also used in the ruling in Allgood v. Meridian Security Ins. Co., 836 N.E.2d 243 (Ind. 2005). The court said the plaintiff was correct “that under common law tort doctrines, the measure of damages…is generally adequate compensation for the loss sustained…[the plaintiff] is also correct that under Indiana law that measure of damages includes diminution in value.” However, continued the court, “tort doctrines are not relevant here. Making a party 'whole' is the province of tort law, but has no application here.” In this instance, the terms of the contract dictated claim settlement, and the policy's “limit of liability” provision governed. Other states have rejected Mabry, including, but not limited to Ray v. Farmers Ins. Exch., 200 Cal. App. 3d 1411 (1988); O'Brien v. Progressive Ins. Co., 785 A.2d 281 (Del. 2001); and Hall v. Acadia Ins. Co., 801 A.2d 993 (Me. 2002).
Endorsement PP 13 01 defines “diminution in value” as “the actual or perceived loss in market or resale value which results from a direct and accidental loss.” Therefore, whether the insured merely believes his car has lost value or has a licensed body shop make a written statement that the covered auto has suffered a certain loss in value due to an accident, PP 13 01 excludes such a loss from coverage.
When repairs are completed correctly and there is still a provable loss of value, then a loss of value claim, as previously noted, can be entertained in many jurisdictions, such as in Lumpkin v. Allstate Ins. Co., 159 S.E.2d 852 (S. C. 1968). It should be noted, though, that this case involved more than simply a loss of value; the adjuster had authorized repairs without consulting the insured. But, when repairs are not completed correctly and the amount of the initial repair estimate was sufficient to adequately repair the vehicle, then liability for the loss of value does not rest with the insured but rather with the repair facility that improperly repaired the vehicle.
In the case of a first-party claim, the carrier's liability for any loss of value is based solely upon the obligations it has to the insured under the terms of the policy contract. As seen in the cases noted, state laws and insurance regulations are not consistent in dealing with loss of value as a separate item of recovery under physical damage coverages. A working knowledge of the law in the state in question is necessary in order to fairly handle claims of this nature. Contract wording also varies, but most policies provide for “payment of the lesser of the amount necessary to repair or replace the property” in some form.
The words “repair” and “replace” mean the restoration of the vehicle to substantially the same condition it was in immediately prior to the accident. When the repair facility does not properly restore the vehicle to its pre-accident condition, the proper measure of damages is the difference between the value of the automobile before the damage was incurred and the value after it was damaged, repaired, and returned to the owner.
The issue then becomes from whom is this “loss of value” recoverable. Assume that the damage to the vehicle was capable of being repaired to its prior condition; the insured selected the repair facility; and the estimate and supplements were reflective of the fair cost of repair. Under these circumstances, the contract terms have been met and recovery should be sought from the repairer, either in the form of corrective repairs or loss of value.
If the damage was so extensive or of such a nature that it could not be properly repaired, and the carrier insisted on repair, then the carrier is responsible for the loss of value. Obviously, the best way to handle this type of claim is with a proper initial vehicle inspection and estimate. If the vehicle is not repairable, it should be handled as a total loss. Nevertheless, if repairs occur under these circumstances, then a claim for diminution of value may be valid.
Establishing the pre-damage and post-damage market value of the vehicle is often difficult. The policy provides for “appraisal” if the insurer and the insured cannot agree on the amount of the loss. Utilizing the appraisal process is similar to the use of experts in a trial setting. Experts might be considered to be new and used car sales people, auto appraisers, and even auto repairers.
The use of multiple available sources to establish the ACV of an owner's vehicle, consideration of possible diminution of value in the post-accident vehicle, and the payment of every penny owed of the claim dollar (but not one cent more), best serve all policyholders.